Risk-Based Financial Planning – The Most Valuable of Assets

By Aaron Klein, CEO, Riskalyze on Tuesday, September 1st, 2015


In times of volatility, a good financial plan is the best friend of advisor and client alike. While most assume a discussion about risk tolerance only applies to asset management, it is also true that asset management is and should always be part of a broader financial plan. Therefore risk tolerance and financial planning are forever and inextricably linked.

Even in times of relative calm, with the rise of the robo-advisor and the apparent commoditization of asset management (whether real or imagined), many advisors are turning to financial planning as their main value proposition. And in times of unexpected volatility, like the recent “Black Monday” that saw intraday losses of 7%+, having that well-thought-out plan with an accurately assigned Risk Number and a clear long term vision is a big relief to advisors.

And yet despite this fact, we’re seeing two confounding challenges that many advisors are faced with overcoming.

  • First, many advisors are having difficulty in selling their clients on the value of holistic financial planning—both because it is a new way of doing business for many advisors, and because it requires a fundamental change in what investors expect from their financial advisor.

  • Second, once an advisor guides their client through the creation of a financial plan, they are faced with the task of ensuring that their client adheres to the plan. Fortunately, when approached with the right mindset and set of tools, these challenges can be easily overcome.

When investors think of the services that a financial advisor provides, usually the first thing that comes to mind for most people is asset management. While there has been sizable, and growing, segment of the industry that has provided financial planning for a long time, advisors generally still have to sell their clients on the value of a holistic financial plan. For some advisors this comes naturally— they know how and when to effectively communicate the value that a financial plan has to the client. For others, especially those who have more recently put a focus on planning, this has presented a real challenge.

There are two practices that we have found to tremendously help advisors convey the value of financial planning to their clients.

  • First, is to bring up the concept of financial planning early and often. As early as the first meeting with a client, advisors should begin to explain the benefits of comprehensive financial planning to their clients and position it as an essential part of managing their wealth.

  • Second, we have found that a very effective and natural transition to having a conversation about financial planning is to talk candidly about risk. After an advisor goes through the risk exercise with their clients, the discussion often turns to whether the selected risk level aligns with the client’s retirement goals. This very quick and simple exercise, easily guides the conversation to financial planning and helps the advisor effectively demonstrate its value.

Once advisors have worked with their clients to create a comprehensive financial plan, another challenge that they face is assisting their clients in adhering to the plan. While clients will always have changing goals and desires that a good plan will be able to adapt to, the fundamental aspects of the plan, including the idea of being a long-term investor, should remain relatively constant. Human beings tend to sabotage their own investing—selling when they get scared and emotional, and buying back in when the markets “feel safe” again. It often falls to the advisor to keep these emotions in check and be the voice of reason when the markets pull back. One key to helping clients remain long-term investors is fully understanding the amount of risk that they are comfortable with, and building that into their plan. While there is very often a difference between the amount of risk an investor can handle and the amount of risk they need to take to reach their goals, the ability to reconcile these in the financial plan—or at the very least understand the point at which the client will need extra support in remaining calm— can be incredibly valuable to the advisor.

No matter what the market throws at you, the old saying applies: Keep Calm, (a.k.a. Know your Risk Number) and Carry On.

Aaron Klein is CEO of Riskalyze, the company that invented the Risk Number™, the first-ever quantitative system for identifying client risk tolerance, aligning portfolios to client expectations, and quantifying the suitability of investments. Riskalyze works with RIAs, hybrid advisors, independent broker-dealers, RIA networks, custodians, clearing firms and asset managers to better align investments with the tolerances and expectations of individual investors.

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